Piecing Together a Telecom Gear Rebound

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Is Alcatel-Lucent a Takeover Target?

Many equipment makers expect to benefit from recent mergers and acquisitions that have reduced the player roster and lessened price pressures. After filing for bankruptcy protection, Nortel Networks has sold most of its businesses in the past several months. On Oct. 13, Cisco (CSCO) snapped up wireless telecom gearmaker Starent Networks for $2.9 billion.

More deals may be in the offing. Shares of Alcatel-Lucent (ALU) have gained 20%, to 4.31, in the last month, partly because of speculation that it may become a target for Chinese vendor Huawei or Nokia Siemens Networks of Europe. Simon Leopold, managing director at Morgan Keegan, says the stock may keep rising to as high as 6 or 7 in the next 12 months, even without a sale.

Some analysts are already upping their forecasts for other telecom equipment vendors. On Oct. 23, Piper Jaffray (PJC) analyst Troy Jensen upgraded Juniper to neutral, from underweight.

Increased demands on the world's wireless and wireline broadband networks from devices such as smartphones and netbooks and applications such as video will probably drive demand for gear. On AT&T's (T) network, users of the iPhone and other mobile gadgets have already boosted traffic 5,000% in the past three years, according to the company. Increased use of netbooks, which allow people to access the Web wirelessly, is also placing demands on network capacity.

Cost-Cutting, Streamlining Continue

With increased popularity of online video downloads from Netflix (NFLX) and Web sites such as Hulu and Google's (GOOG) YouTube, traditional wireline networks are filling up capacity as well. Wired broadband usage is rising at 35% to 40% a year. That's lower than the peak gain of 60%, but still substantial, says Eve Griliches, a program director at IDC.

Some telecom gear makers will need to rely on cost savings and streamlined operations—as well as rising demand—to eke out bottom-line growth amid still-formidable competition from Chinese manufacturers. Ericsson (ERIC), for instance, is focusing on software and services. This summer, Sprint Nextel (S) outsourced its network management and 6,000 related employees to Ericsson.

"In this industry, opportunities keep emerging," says Ericsson CEO Carl-Henric Svanberg. "It is a very rapidly evolving industry with lots and lots of opportunities. Most analysts are good at predicting where the businesses you are sitting on will go. But what surprised me most at a company like Ericsson is seeing the new opportunities and changes. That's what makes it exciting."

Kharif is a senior writer for BusinessWeek.com. With Peter Elstrom, assistant managing editor at BusinessWeek

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